June 28 (Bloomberg) -- Barrick Gold Corp. and Kinross Gold
Corp. are trading as if they’ve lost their investment-grade
ratings after the price of the metal plunged 28 percent this
year to the lowest since August 2010.

Barrick Chief Executive Officer Jamie Sokalsky is reducing
spending and selling assets as gold heads for its first annual
drop since 2000. Barrick, which had $12.5 billion of net debt as
of March 31 and sold $3 billion of bonds in April to bolster
liquidity, also faces higher costs at its delayed and over-budget billion-dollar Pascua-Lama gold project in the Andes.

“All the gold names have been pretty much getting hammered
both on the credit side and the equity side for quite some time
with gold prices coming down,” Wen Li, an analyst at
CreditSights Inc., said in a phone interview yesterday. Pascua-Lama is also a “really big overhang” for Barrick, he said.

Barrick’s bonds have declined 12 percent since May 1, the
fourth-biggest drop among issuers in Bank of America Merrill
Lynch’s U.S. Metals, Mining and Steel Index. Goldcorp Inc.’s
notes have slid 9.4 percent and Kinross’s by 7 percent. The
largest 50 issuers in the index have lost an average 9 percent.

‘Inevitable Pressure’

“If all currently planned projects go forward, and current
metals prices and financial policies continue, the simple math
results in inevitable pressure on credit metrics and ratings”
in the industry, said Kevin McSweeney, money manager at CI
Investments Inc., which oversees about $74 billion of assets.

Gold futures in New York yesterday dropped below $1,200 for
the first time since August 2010, as signs of improving U.S.
economic growth boosted speculation the Federal Reserve will
wind down its asset-purchase program.

Gold futures for August delivery settled today at $1,223.70
an ounce on the Comex in New York, 36 percent below the record
$1,923.70 reached in September 2011.

“Our investment grade rating was recently reconfirmed by
all three rating agencies, with Moody’s re-confirming a Baa3
rating just earlier this month,” Steve Mitchell, a spokesman
for Toronto-based Kinross, said yesterday by e-mail.

Debt Obligations

Barrick has the lowest operating costs of the senior
producers and almost 60 percent of its production in the first
quarter came from five mines at a cost of $591 per ounce, said
Andy Lloyd, a company spokesman.

“Our debt repayment obligations in the next few years are
modest, with the majority maturing beyond 2023,” Lloyd said in
an e-mail yesterday.

Jeff Wilhoit, a spokesman for Vancouver-based Goldcorp,
didn’t respond to telephone calls or an e-mail yesterday seeking
comment on the bonds’ performance.

High-yield, or junk bonds, are rated below Baa3 by Moody’s
Investors Service and lower than BBB- at Standard & Poor’s.

Valeant Bonds

The Laval, Quebec-based company also is planning $4.05
billion in loans to help fund the purchase. Valeant issued $1.63
billion of eight-year securities yielding 7.5 percent and $1.6
billion of five-year notes with a yield of 6.75 percent.

The extra yield investors demand to own the debt of
Canadian investment-grade corporations rather than the federal
government was unchanged at 124 basis points, or 1.24 percentage
points yesterday, according to data compiled by Bank of America.
Yields fell to 3.18 percent from 3.22 percent.

In the provincial bond market, relative yields were
unchanged at 72 basis points yesterday, according to another
Bank of America Merrill Lynch index. Yields dropped to 2.91
percent, from 2.96 percent.

Default Swaps

The relative yield investors demand to hold Barrick’s bonds
have surged to an average 332 basis points from 224 basis points
on May 1, according to Bank of America. Its credit-default swaps
have implied a speculative grade rating of Ba1, the highest junk
rating, since mid-April and over the last two days dropped to as
low as Ba3, according to Moody’s data.

Barrick could face a ratings downgrade of “another notch
or so” if gold prices decline further and stay lower for a
prolonged period, although it will probably remain investment
grade, said Li.

“They will get hit pretty hard in terms of earnings and
margins and free cash flow” at lower prices, he said.

Barrick has forecast it will cost $950 to $1,050 to produce
an ounce of gold on average from all its mines this year.
Goldcorp forecast a cost of $1,000 to $1,100.

Barrick’s net debt would probably increase to a peak of
$15.8 billion in 2014 if it decides to cancel its Pascua-Lama
project, assuming a gold price of $1,300, Anita Soni, a Toronto-based analyst at Credit Suisse Group AG, said in a note dated
June 25. Net debt could rise to $17 billion in 2015 if the
project on the Chile-Argentina border goes ahead.

Gross debt

Repayment becomes a concern with gold under $1,300, though
only in the longer term because the company has good access to
the debt market and $14 billion of its $17.7 billion gross debt
is due in 2018 or later, she said.

Barrick had $2.34 billion in cash and equivalents as of
March 31, according to data compiled by Bloomberg, and said May
2 it completed the sale of $3 billion of 5-, 10- and 30-year
notes. The company also had undrawn credit of $2 billion, Chief
Financial Officer Ammar Al-Joundi said on an April 24 conference
call. The company’s debt repayment obligations through 2017 were
less than its operating cash flow last year, he said.

Barrick, which last year raised the cost estimate for
Pascua-Lama to as much as $8.5 billion, said June 3 that
production won’t start in the second half of 2014 as planned,
because of demands from Chile’s environmental agency, and that
the delay would probably lead to higher capital costs.

Barrick will probably re-evaluate its capital spending
plans in light of the current gold price, which may help reduce
its financing burden, Joel Levington, managing director of
corporate credit research at Brookfield Investment Management
Inc. in New York, said in an e-mail.

“Barrick will be able to maintain investment-grade
ratings, but a downgrade to low-BBB would not be surprising,”
he said.